Strategies to thrive in a post-financial crisis legal marketplace

July 2014 First Focus

The legal profession has not been the same since the 2008 financial crisis. Demand for legal services continues to be slack, dampening law firm growth and profit.  At the same time, clients have upended the traditional law firm model with their demands for lower prices. Gone are the days of the unchallenged fee estimate and the double-digit increases in profit. 

Stuart J.T. Dodds

Stuart J.T. Dodds

In his new book, “Smarter Pricing, Smarter Profit,” author Stuart J.T. Dodds says that success in today’s market requires a fresh approach made up of more predictable prices based on value and sound project management strategies to maintain those prices. Are you prepared to thrive in this new environment? As director of global pricing and legal project management for Baker & McKenzie, Dodds shares some practical advice to help lawyers move their practices successfully into this new world of competition.

You describe this period after the 2008 financial crisis as the "new normal." Could you elaborate?

The global financial crisis fundamentally and permanently “reset” the relationship between a law firm and its clients. There was a fundamental change in supply and demand, with significantly lower amounts of transactional work being conducted and a greater desire among clients to avoid lengthy litigation. This shifted the balance of power between general counsel and their legal providers, with the former beginning to reassess how they engage law firms. General counsel are now bringing more expertise in house, using a wider range of providers and establishing legal panels primarily focused on cost.

Nowhere is the impact of the crisis more visible today than in how law firms engage clients and price and deliver their services. Today’s legal market includes more modest annual adjustments to law firm rates, greater emphasis on delivering cost-efficient work and a greater focus on value to the client, coupled with much more limited organic growth in the market.

You say that becoming a "profitable practicing lawyer" is now essential. What are some of the characteristics of one?

A profitable practicing lawyer, in my view, is one who first understands the value of the services being delivered, as defined by the client, and second, knows the true cost of delivering those services. A profitable practicing lawyer is focused on developing deep and strong relationships with clients, but also recognizes that not all work has the same value and that he may need to refine his delivery approach according to the matter at hand.  In today’s environment, these skills are essential. 

A profitable lawyer is one who is focused both on the legal aspects of the matter, as well as on the effective and efficient delivery of the matter. She is focused on efficient delivery of services, managing costs, managing risk, delivering value and providing regular proactive client communication.

Although the term “profitable” may be a red flag to some, law firm clients want to deal with those law firms that are sustainable in the long term and are well-managed, both from a service delivery and business efficiency perspective. Profitability in a law firm today is nothing more than setting a fair and transparent price for work then managing the work efficiently to meet the estimate. Having an open dialogue with clients about these matters is critical and beneficial to both clients and their law firms. 

While the majority of legal work is still billed by the hour, you say that hourly based fees will become the exception rather than the rule -- with alternative fee arrangements among the models taking their place. What are some tips for lawyers (or law firms)  implementing AFAs?

Much has been written already on what makes AFAs – which I prefer to call “appropriate fee arrangements” – successful. Over the last few years there have been many positive examples of mutually beneficial arrangements being implemented. 

In our experience at Baker & McKenzie, AFAs have been successful due to the following:

AFAs need to be simple and easily understood, which was often not the case a few years ago in the industry. They also need to provide greater predictability of cost to the client, and they need to reflect a fair price for the value delivered – and have this fair value acknowledged by the client. 

There needs to be a strong relationship between the law firm and client for AFAs to work.  A strong relationship includes a common understanding of what constitutes “success” and an open, honest and ongoing dialogue. The vast majority of these fee approaches benefit both the client and the law firm, but if things go awry on a specific matter, both parties need to be able to quickly have an honest and open conversation and get things back on track.

Tell me more about the client’s role in determining pricing strategy.

Having an open dialogue with clients and understanding their priorities are absolutely critical to developing an effective pricing strategy. 

At one level, the price of a service or matter needs to reflect the value to the client. It is the client who determines what the value of a specific matter is, and although law firms can help identify the key sources of value, ultimately it is the client's decision.

As law firms look at their client relationships, they should tailor their pricing strategy to align with what is important to their clients. In that sense, pricing is similar to many aspects of a strong client relationship - not engaging clients about their priorities and objectives can result in misalignment that harms the overall relationship.

You say that leverage is the magic ingredient to better profitability and happier clients. Could you elaborate?

“Leverage” at its most simple level is the ratio between partners and nonpartners. Although sometimes taken to mean “pushing work down to the most junior level,” it is actually much more refined than that.

Leverage is using the appropriate resources to do the tasks required in the most efficient manner possible. This may mean having a more senior staff member doing a task because of his or her efficiency and experience in the matter.

When done well, this type of planning drives down the cost of resourcing, which in turn  lowers costs for the client and also helps improve the overall profitability of the matter for the law firm. Taking a smart approach to leverage is a genuine “win-win,” resulting in lower fees and more efficient execution of the matter for the client, as well as better profitability for the law firm. 

Leverage is also something that law firms can control, independent of market forces. I believe that law firms, such as Baker & McKenzie, who are actively embracing legal project management and legal process improvement, will be well positioned to better serve their clients now and over the long term.

The "new normal" has made legal project management essential. What are some of the elements of a successful LPM program?

The key focus needs to be on behavioral change instead of on software or other support. Firms can have the most advanced software applications to help support LPM initiatives, but if the attorneys, whether in a law firm or law department, do not see why they should change what they currently do, nothing happens and that significant investment is wasted. 

In my experience, key elements that make a successful LPM program typically include the following:  (1) knowing what you are trying to achieve with the initiative from the outset;  (2) making sure the approach you adopt is appropriate for your firm’s culture, strategy and clients; (3) identifying powerful (and credible) champions and securing visible commitment from your firm’s leadership for the short, medium and longer term; (4) focusing on those areas where you can make a real difference (this typically should focus on your attorneys’ current needs); (5) conducting training in parallel with developing appropriate tools and infrastructure; and finally, (6) getting some early successes – nothing works better than having some quick wins to encourage greater buy-in.

In summary, a successful LPM program is supported by thinking big, starting small and above all else, keeping it simple.

Describe the difference between legal project management and typical project management.

First, let me start by acknowledging that there are many similarities between the two. At their most basic level, each type of management is a structured, proactive approach to planning and managing a project. However, there are two or three key differences in what we do in the practice of law. 

The first, and biggest difference, is the much more fluid nature of many of the matters we work on. Therefore, the need to manage change effectively is critical. Although all projects may experience change from the original scope, the frequency of the changes and potential impact of those changes can be much greater for legal matters. For example, think of what may happen during a discovery or due-diligence phase of a respective matter. Suddenly the scope you thought you were addressing has potentially doubled in size. This, in turn, can have a significant impact on scheduling and cost.

The second difference is the need for much more frequent client (or law firm) communication, in part due to the above reasons. And third, for legal matters, there is the need to effectively and regularly review matter scope and ensure that objectives remain aligned.

You make the case that the traditional metrics to evaluate performance are inadequate and that firms should focus more on client-facing metrics. What are some of those metrics?

Client-focused law firms ought to capture and measure what is important to their clients (a critical one here being the ability to manage to budget), seek ways to incorporate client feedback and look to quantify the value of work conducted. Incorporating those metrics that are more operational in nature is also recommended. For example: What is the typical speed to complete matters of a certain type? Are the lawyers using the correct matter budgeting tools? What proportion of matters are being conducted on an AFA basis? Have the attorneys been trained in legal project management and so forth.

Taking a step back for a comprehensive review of the metrics and making incremental improvements will be good for law firms and clients alike.